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Competition in dual markets: Implications for banking system stability

Author

Listed:
  • Tastaftiyan Risfandy

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Irwan Trinugroho

    (Faculty of Economics and Business - UNS - Universitas Sebelas Maret)

Abstract
This paper examines the impact of market competition on the stability of Islamic and conventional banks in countries where these banks operate alongside one another. To investigate this issue, we use a sample of 100 Islamic and 390 conventional banks from 19 countries. Our baseline result shows that competition in a dual market erodes banks' stability. The heightened competitive pressure in a dual market encourages banks to engage in excessive risk-taking that can jeopardize their stability. However, the effect of competition is missing for Islamic banks, suggesting their superiority in having religious clients. Although our overall results support the 'competition-fragility' hypothesis, we find that competition can be beneficial for banks, especially at a low to medium competition level. Last, we also find that the adverse impact of competition can be reduced by having high capitalization, especially in the case of a conventional bank. Some policy implications are discussed in the paper.

Suggested Citation

  • Tastaftiyan Risfandy & Amine Tarazi & Irwan Trinugroho, 2018. "Competition in dual markets: Implications for banking system stability," Working Papers hal-01757982, HAL.
    • Handle: RePEc:hal:wpaper:hal-01757982
    Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-01757982
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    Cited by:

    1. El Moussawi, Chawki & Mansour, Rana, 2022. "Competition, cost efficiency and stability of banks in the MENA region," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 143-170.
    2. Ernaningsih, Indria & Smaoui, Houcem & Temimi, Akram, 2023. "The effect of capitalization on the competition-stability Nexus: Evidence from dual banking systems," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    3. Wajahat Azmi & Zaheer Anwer & Mohsin Ali & Shamsher Mohamad, 2024. "Competition, stability, and institutional environment: The case of dual banking economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 609-631, January.
    4. Dibooglu, Sel & Cevik, Emrah I. & Tamimi, Hussein A. Hassan Al, 2022. "Credit default risk in Islamic and conventional banks: Evidence from a GARCH option pricing model," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 396-411.
    5. Ernaningsih, Indria & Smaoui, Houcem & Ben Salah, Ines, 2024. "Competition, regulation, and systemic risk in dual banking systems," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1087-1103.

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    More about this item

    Keywords

    Competition; stability; dual banking; Islamic banks; Z-score; Lerner index;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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